Chapter 1: Intro

1. Financial Assets
Definition: Financial assets are intangible assets, represent a claim to future cash for its
holder.
Role of Financial assets: 2 economic functions of financial assets
- Transfer funds from those who have surplus funds to those who need funds
- Redistribution the investment risk among those seeking and those providing the
funds.

2. Classifications of Financial Assets

Financial assets are mainly classified in 2 ways by its characteristics:
- By the nature of claims
 Debt securities: Holders are the lenders of Issuer
 Equity securities: Holders share the ownership with the Issuer
- By the maturity of the financial assets
 Mature in a year or less
 Mature in more than a year

3. Financial Market Participants

Surplus units/ Lenders/ Fund providers/ Savers: is an economic unit with income that
is greater than or equal to expenditures on consumption throughout a period.
+ Motivation of lenders: Time value of money; inflation; interest rate; etc
Deficit units/ Borrowers/ Fund Seekers: is an economic group within that economy, has
spent more than it has earned over a specified measurement period.
+ Motivation of borrowers: Need of capital/ shortage of fund; risk sharing; etc.

4. Financial Market Classification

 By Nature of Claim
Debt Market Equity Market
Where debt securities are exchanged: Where equity securities are
exchanged:
- Treasury bill
- Treasury bond - Common stock
- Municipal bond - Preferred stock
- Corporation bond
- Repurchased agreement
- Commercial paper
  By Maturities
Money Market Capital Market
Where short-term debt (mature in ≤ 1 Where long-term securities (mature
year) are exchanged in ≥ 1year) are exchanged
- Treasury bill - Treasury bond
- Repurchased agreement - Municipal bond
- Commercial paper - Corporation bond
- Negotiable certificates - Common Stock
of deposit (NCDs)
- Banker acceptances

 By Seasoning of Claim
Primary Market Secondary Market

- New securities are sold to the - Securities are exchanged

public for the first time among investors
- Investors are able to purchase - Price is fluctuated based on
securities directly from the the issuers performance, the
issuer market sentiment, the
o Initial public offering economic and industrial
(IPO) situation, etc.
o Private placement National Stock Exchange
(NSE)
o Rights issue
New York Stock Exchange
o Referred allotment
(NYSE)
London Stock Exchange (LSE)
Ho Chi Minh Stock Exchange
(HOSE)

5. Classifications of Bonds
By issuers
- Treasury bonds are issued by the central government to finance government
expenditure VD: VN government
- Municipal bonds are issued by the state and local government VD: TN government
- Corporate bonds are long-term debt issued by Corporation
By payment policies
 - Zero-coupon bonds: bonds with zero-coupon payment but are issued at a deep
discount from par value
- Variable-rate bonds: bonds with the coupon rate is not fixed as normal bonds but
floating
- Convertible bonds: bonds, which could be converted to a stated number of share of
the issuer’s common stock. Normally, convertible bonds have lower coupon rate
because of its premium right

6. Bond Evaluation and Rate of Return

 Bond Evaluation
As other financial assets, bond valuation is calculated based on its expected future return of
its holder as below:

In which:
C = coupon payment provided in each period
Par = par value / principal fund, which is returned at the maturity
k = required rate of return per period used to discount the bond
n = number of periods to maturity
 Rate of Return (tỷ suất sinh lời)
Rate of return is defined as the payments to the owner plus the change in its value,
expressed as a fraction of its purchase price

Where:
R: Rate of return Pt+1: selling price
C: Coupon payment Pt: Purchasing price

7. Factors that affect bond price

Factors affecting bond price include:
- Interest rate
- Inflation
- Economic growth
- Money supply
 - Budget deficit (with government bond)
- Issuers business conditions
These factors change the required rate of return of the holder, which lead to the change in
the demand for bond in the financial market.
=> Affecting the bond market price

8. Yield to Maturity
Bond yield to maturity is the interest rate that equates the present value of cash flow
payments (coupon payments + principal payments) received from a debt instrument with its
value today (a.k.a market price)

P = Market price
C = Coupon payment
F = Face value
n = number of coupon period
i = Yields to Maturity

Practice Exercises:
1. You expect a stock to reduce from its price of 90 USD/share on Day 1 but
does not want to tie up your available funds by investing in this stock. Thus,
you purchase a call option on the stock with the volume of 50 shares and the
exercise price of 95USD/share and the premium of 2USD/share. At the
option’s expiration date, the stock price rises to 110USD. Now, what is your
decision with this call option contract? What is your profit/loss with that decision?
1. - Call Option Purchase:
o You bought a call option with the following details:
 Strike price: $95 per share
 Premium paid: $2 per share
 Volume: 50 shares
2. Stock Price Movement:
o The stock price rose to $110 per share at the option’s expiration date.
3. Decision and Profit/Loss Calculation:
o To decide whether to exercise the call option, compare the stock price with the strike price:
 Stock price at expiration = $110
 Strike price = $95
o Since the stock price is higher than the strike price, it’s beneficial to exercise the call option.
o Profit from exercising the call option:
 Profit per share = Stock price at expiration - Strike price - Premium paid
 Profit per share = $110 - $95 - $2 = $13
 Total profit = Profit per share × Volume
 Total profit = $13 × 50 = $650
4. Summary:
o Your decision is to exercise the call option.
o Your total profit from this call option contract is $650.

2. Choose the best describe each transaction:

Classify the market in which each of the following financial transactions takes
place as: (i) money versus capital, (ii) primary versus secondary, (iii) open
versus negotiated, or (iv) spot versus futures or forward.
a) Buy Commercial paper
b) Sell Barclay stocks on London Stock Exchange
c) Open demand account at bank
d) Issue check
a a) Buy Commercial paper

i) Money market
ii) Primary market
b) Sell Barclay stocks on London Stock Exchange
i) Capital market
ii) Secondary market
c) Open demand account at bank
i) Money market
iii) Open market
d) Issue check
i) Money market
3. You recently got a job with the salary for $100,000 per year. Your current savings are $50,000. You have a mortgage loan worth

$20,000 that will require you to make monthly payments of $167 for the next 10 years. Now, you need a car to drive to work and have a

small noninterest-bearing bank account of $5,000. You could either buy a used car for $2,600 or take out a loan for $12,000 for a new

car. The new loan would require a down payment of $3,000 and five years of monthly payments of $250. Your parents are willing to

give you $1,000 for support, which you could use to purchase the car. You estimate that $1,800 per month in discretionary income

would be comfortable for you to live on.

a) What is your current net worth (total assets)?

Net worth = Total asset – Total Liabilities

= (Current saving + bank account + support from parent) - (Mortgage loan)

= ($50,000 + $5,000 + $1000) – ($20,000)

= $36,000

b) How much discretionary income would you have each month if you bought the new car? Would it be feasible for her to save $300 per

month and make all your payments?

With the salary of $100,000 annually, your monthly income would be: $100,000/12 = $8,333

If you buy a new car and have to pay a car loan of $250 monthly out of the down payment of $3,000, which you will pay with your current saving

($50,000) plus the financial support from your parents ($1,000). Then, your total expenses monthly will be: $167 + $250 + $1,800 = $2,217.

Thus, your discretionary income every month would be: $8,333 - $2,217 = $6,116

With this discretionary income, you totally have ability to save $300 per month.

4. You have the assets include: (i) a market value of $80,000 for your home; (ii) $5,000 in stock; (iii) a T-bond with a face value of $2,000

to be received at the end of the month, for which the current market value was $960; (iv) a deposit account of $3,000 at bank; and (vi)

some other items that have the values of $20,000. Your only have a liability, which is your university tuition loan, which has a balance

totaling $50,000. It is now the end of the month and you’ve just received $6,000 of your salary, along with the income from the

maturing T-bond and interest on your bank deposits, which were paying an annualized interest rate of 4 percent annually (4/12 percent

per month). Your tuition loan payment was $1,700, of which $700 would go toward the principal. Your other expenses for the month

came to $3,500. You had planned to make an additional tuition loan payment for the month, all of which would go to paying down the

principal on the loan. However, your girlfriend wants to go to Phu Quoc with you for the summer vacation. The expense of your trip

would be an additional $2,000.

a) Would you be able to make the additional tuition loan payment and fund your trip with girlfriend without reducing your deposit

account balance? Let's calculate your current financial situation:

Assets:
- Home: $80,000
- Stock: $5,000
- T-bond (current market value): $960
- Deposit account: $3,000
- Other items: $20,000
- Salary: $6,000
Total assets: $114,960
Liabilities:
- Tuition loan balance: $50,000
Income:
- T-bond income: $2,000 - $960 = $1,040
- Bank deposit interest: $3,000 * (4/12)% = $10
- Total income: $1,040 + $10 + $6,000 = $7,050
Expenses:
- Tuition loan payment: $1,700
- Other expenses: $3,500
- Additional tuition loan payment: $700
- Trip expense: $2,000
Total expenses: $1,700 + $3,500 + $700 + $2,000 = $7,900
Net cash flow: $7,050 (income) - $7,900 (expenses) = -$850
Given that your net cash flow is negative, you would not be able to make the additional tuition loan payment and fund the trip with your girlfriend
without reducing your deposit account balance. You may need to reassess your expenses and possibly postpone the trip until you have enough funds
available.
b) What would your net asset be if you funded your trip and made the additional tuition loan payment?

To calculate the net asset after funding the trip and making the additional tuition loan payment, we need to first calculate the total income and total
expenses for the month.
Total Income:
- Salary: $6,000
- T-bond maturing value: $2,000
- Bank deposit interest: $3,000 * (4/12)% = $10
Total Income = $6,000 + $2,000 + $10 = $8,010
Total Expenses:
- Tuition loan payment: $1,700
- Other expenses: $3,500
- Trip expense: $2,000
Total Expenses = $1,700 + $3,500 + $2,000 = $7,200
Net Income = Total Income - Total Expenses = $8,010 - $7,200 = $810
After deducting the expenses, you would have a net income of $810.
Therefore, your net asset after funding your trip and making the additional tuition loan payment would be:
Total Assets = $80,000 (home) + $5,000 (stock) + $960 (T-bond) + $3,000 (bank deposit) + $20,000 (other items) = $109,960
Total Liabilities = $50,000
Net Asset = Total Assets - Total Liabilities + Net Income = $109,960 - $50,000 + $810 = $60,770
c) What would your net asset be you did not fund the trip and only made the additional tuition loan payment?

To calculate your net assets if you did not fund the trip and only made the additional tuition loan payment, we first need to calculate your

total assets and liabilities after receiving your salary and income from the maturing T-bond and bank deposits.

Total Assets:

Home value: $80,000

Stock: $5,000

T-bond market value: $960

Deposit account: $3,000

Other items: $20,000

Salary: $6,000

Total Assets = $80,000 + $5,000 + $960 + $3,000 + $20,000 + $6,000 = $114,960

Liabilities:

Tuition loan balance: $50,000

Next, let's subtract your expenses for the month, including the tuition loan payment and other expenses:
 Expenses:

Tuition loan payment: $1,700

Other expenses: $3,500

Total Expenses = $1,700 + $3,500 = $5,200

After deducting your expenses from your total assets, you would have:

Net Assets = Total Assets - Total Liabilities - Total Expenses

Net Assets = $114,960 - $50,000 - $5,200

Net Assets = $59,760

Therefore, if you did not fund the trip and only made the additional tuition loan payment, your net assets would be $59,760.

d) Would your net worth change if you decided to fund the trip, but did not make the additional tuition loan payment? Explain.

If you decided to fund the trip but did not make the additional tuition loan payment, your net worth would decrease.

Before funding the trip, your assets total $110,000 ($80,000 home + $5,000 stock + $960 T-bond + $3,000 deposit account + $20,000

other items + $6,000 salary) and your liabilities are $50,000 tuition loan. This gives you a net worth of $60,000.

If you decide to fund the trip and subtract the additional $2,000 expense, your new assets total $108,000 ($80,000 home + $5,000 stock +

$960 T-bond + $3,000 deposit account + $20,000 other items + $6,000 salary - $2,000 trip expense), but your liabilities remain at $50,000

tuition loan. This gives you a new net worth of $58,000.

Therefore, by funding the trip without making the additional tuition loan payment, your net worth would decrease by $2,000.

5. You purchased a new home valued at $300,000. You paid a 25 percent initial down payment. You looked at your balance sheet to

determine what your cash flow would be for the month. Your new mortgage payment was $1,500, of which only $200 would go toward

the principal in the first month. You had a bank deposit account of $4,500, which you had set aside for a short vacation. You also

owned $5,000 of stock. Your income for the month was $8,000, but you anticipate receiving a sales bonus of $2,500. You estimated

your usual monthly expenses, other than your mortgage, to be $3,000.

a) If your estimates are all accurate, would you have any additional income left over at the end of the month that you could add to

the money you had set aside for the upcoming vacation.

If your estimates are correct, you will receive $8,000+$2,500 = $10,500 in income this month and will have $1,250+$3,000=$4,250 of

expenses.

This means you will have $10,500-$4,250=$6,250 left over that you could add to your vacation account.

b) If you failed to receive the sales bonus, would you have to sell stock to keep from drawing down your bank deposit account and

having to curtail your vacation?

If you fail to receive your sales bonus, you will still earn $8,000.

In this case you will have $8,000-$4,250 = $3,750 left over to put toward your vacation.
 Chapter 2: Financial Institutions, Financial Intermediaries, and Asset
Management Firms
1. Financial Services
- Transforming Financial Assets
EX: Derivative, Stocks, Bonds, Loans -> bank -> deposit account -> customer
-> Chức năng: chuyển đổi tài chính
- Exchanging of Financial Assets on behalf of customers
EX: Trust fund (quỹ tín thác) -> giữ tiền cho người đầu tư
- Exchanging of FAs on its own account
Ex: Mutual Fund (quỹ đầu tư tương hỗ) -> lấy tiền của người đầu tư đem đầu tư cho nó -> lãi/
lỗ của nó
- Assisting the creation of FAs
Ex: Security firm
- Provide investment active
Ex: Briderage firm
- Manage investment portfolio
2. Financial Institutions
2.1. Definition:
A financial institution (FI) is a company engaged in the business of dealing with financial and
monetary transactions such as deposits, loans, investments, and currency exchange. Financial
institutions include a broad range of business operations within the financial services sector,
including banks, insurance companies, brokerage firms, and investment dealers.
2.2. Roles:
1. Economic Growth of the Nation
At the national level, financial institutions are subject to government regulation. They serve
as an agent of the government and develop the country’s economy. For instance, following
government regulations, financial institutions may extend a selective credit line with lower
interest rates to assist a struggling industry in resolving its problems.
2. Capital Formation
Financial institutions offer financial services to investors who require external cash to raise
their capital stocks by accepting individual savings. Investors may want financial services to
carry out development plans by setting up new machinery, tools, and equipment; constructing
a new facility; and purchasing new transport vehicles, among other things. Financial
institutions contribute to the creation of capital in this way.
3. Regulate Monetary Supply
The financial institution assists in controlling the amount of money in the economy. These
organizations keep the money supply stable and manage inflation. The Federal Reserve Bank
regulates the nation’s liquidity in several ways, including adjusting repo rates, participating in
open markets, and setting cash reserve ratios. To control liquidity, financial institutions
participate in the purchasing and selling of government assets.
4. Banking Services
Commercial banks and other financial institutions assist their clients by offering savings and
deposit services. Additionally, they provide their clients with credit options, including
overdraft facilities, to meet their short-term funding needs. Additionally, commercial banks
offer their clients loans such as house loans, mortgages, personal loans, and loans for
schooling.
5. Pension Fund Services
Financial institutions assist people in retirement planning through the different types of
investment plans they offer. A pension fund is one of these investing possibilities. Employers,
banks, or other institutions contribute to the investment pool on behalf of the individual, who
then receives a lump sum or monthly income upon retirement.
3. Financial intermediaries
3.1. Definition
A financial intermediary is an entity that acts as the middleman between two parties in a
financial transaction, such as a commercial bank, investment bank, mutual fund, or pension
fund.
3.2. Classification: 2 types
+ Depository (accept deposit): kí quỹ
Ex: Commercial banks, central bank, private sector bank
+ Non- depository: ko kí quỹ
 Contractual intermediaries: long-term insurers, short-term insurers, retirement funds
 Collective investment schemes: mutual funds, property unit trusts, exchange traded
funds
 Alternative investment: Hedge funds, private equity funds
3.3. Functions
+ Convert savings into investment
+ Provides cash facilities
+ Providing loans
+ Assist clients to grow their investments
3.4. Roles
+ Maturity intermediation
+ Reduce risk via diversification/ by diversifying the investment portfolio
+ Reduce the cost of the transaction
+ Providing a payment mechanism
4. Financial intermediaries management .

Financial Intermediaries is an important type of financial institution. Financial

Intermediaries obtain funds by issuing financial claims against themselves to market
participants and then investing those fund as their own assets

=> Channelize savings into investment

+ Financial Intermediaries Classification

Financial Intermediaries could be classified into 2 main types:

-Depository institutions: Participate in the economy by accepting deposits, lending

loans and making investment

Ex: Commercial banks, savings banks, credit unions, thrift institutions, etc.

-Non-depositary institutions: is the financial institutions that don’t accept deposit

Ex: investment companies, mutual funds, hedge funds, etc.

+ Roles of Financial Intermediaries

Financial Intermediaries transform the financial assets from less desirable to a the
public to more preferable – their own liabilities by involves one or more of 4
following functions:

 Maturity intermediation

 Reduce risk via diversification

 Reduce cost of transaction and information processing

 Providing a payment mechanism

+ Potential Issues with Financial Intermediaries

- It is possible that a financial intermediary may spread risk. They may channel
depositor’s funds to schemes that earn them (intermediaries) more profits. Or, due
to poor management, they may invest money on ill-judged schemes.

- They heavily rely on liquidity and confidence.

Once Financial intermediaries run into trouble, the whole financial markets and
economy may become fragile

Ex: Mortgage crisis 2008

5. Types of Liabilities (4)

- Type I of Liabilities
+ Both the amount and the timing of the liabilities are known with certainty
Ex: Bond issued by financial institutions
1 year depository of a men in a saving account
- Type II of Liabilities
+ The amount of cash outlay is known, but the timing is uncertain
Ex: Life insurance contract (insurance company agrees to make a specified dollar payment to
policy beneficiaries upon the death of the insured)
- Type III of Liabilities
+ The timing of the liabilities is known, but the amount of cash out is uncertain
Ex: Certificate of Deposit with floating-rate
- Type IV of Liabilities
+ Both amounts of cash out and timing are uncertain
Ex: Home insurance or car insurance contracts

Chapter 3: Depository Institutions: Activities and Characteristics

1. Commercial bank
1.1. Definition: A key financial intermediary because they serve all types of surplus and
deficit units
A commercial bank is a financial institution that provides services like loans, certificates of
deposits, savings bank accounts bank overdrafts, etc. to its customers. These institutions
make money by lending loans to individuals and earning interest on loans. Various types of
loans given by a commercial bank are business loans, car loans, house loans, personal loans,
and education loans.
1.2. Classification
- Retail banks (individual banks): individual, households
- Wholesale banks (Institutional banks): Business
1.3. Operations
* Sources of funds: 3 main sources
- Deposit account:
+ Transaction deposit (tiền gửi giao dịch): demand deposit account/checking account: pay
no interest and could be withdrawn upon demand
+ Saving deposit (tiền gửi tiết kiệm): pay interest, typically below market interest rate, do
not have a specific maturity, and usually can be withdrawn upon demand
+ Time deposit (tiền gửi có kì hạn): pay either a fixed or floating interest rate and cannot
be withdrawn until a specified maturity date
- Non-deposit Borrowed Accounts:
+ Federal fund market:
 only to fulfill reserve requirements
 interest rate= federal fund rate
 Reserve requirement (ycau dự trữ): % deposit that the bank needs to keep in reserve
account required by central bank
Reserve < Requirement -> deficit RA”reserve account” (thâm hụt)-> cho thêm tiền
từ nhà/ vay
Reserve > Requirement -> excessive RA (thặng dư)
+ Borrowing from federal bank:
 Collateral loan (vay có thế chấp)
 Interest rate= primary credit lending rate / discount rate (lãi suất cho vay tín dụng
chính hoặc lãi suất chiết khấu)
+ Repo (repurchase agreement): bán chứng khoán cho 1 bên khác và sẽ mua lại vào 1 ngày cụ
thể với giá xác định
- Long-term sources of fund:
+ Bonds Issued by the Bank: finance long-term need of capital
+ Bank capital: issuance of stock or the retention of earnings: Capital Requirement (>=8%
lending)
1.4. Uses of funds
 Cash: Banks must hold some cash to maintain some liquidity and to accommodate
any withdrawal requests by depositors and to meet the reserve requirements enforced
by the Federal Reserve
 Bank loans: Loans is a main use of bank fund. The loan amount and maturity can be
tailored to the borrower’s needs
  Securities investment: Security investments give bank higher liquidity than loans but
lower rate of return
 Federal funds sold (loaned out): The funds sold, or lent out, will be returned (with
interest) at the time specified in the loan agreement. The loan period is typically very
short, such as a day or a few days
 Repurchase agreements(Repo) involves repurchasing the securities it had previously
sold to raise fund
 Fixed assets
 Proprietary trading: Banks use their own funds to make investments for their own
account.
1.5. Liquidity management
Banks can resolve liquidity problems with the following strategies:
 Management of Liabilities: Proper management of temporary, short term and long
term liabilities
 Management of Money Market Securities: The bank’s asset composition also affect
its degree of liquidity
 Management of Loans: Loans provide bank higher interest return at a lower liquidity
degree
 Use of Securitization to Boost Liquidity: Banks are more liquid as a result of
securitization because they effectively convert future cash flows into immediate cash
1.6. Interest rate management
- To manage interest rate risk, a bank measures the risk and then uses its assessment of future
interest rates to decide whether and how to hedge the risk, to assess interest rate risk, banks
use:
 Gap analysis
 Duration analysis
 Regression analysis
- To reduce interest rate risk, bank could applied:
 Maturity matching
 Floating-rate loans
 Interest rate futures contracts
 Interest rate swaps
 Interest rate caps (lãi suất tối đa)
2. Thrift banks
2.1. Definition: Def. Institution that aim to provide low IR mortgage loan for real estate
buyer-> social purpose of Thrift
- A thrift bank is a type of financial institution that specializes in offering savings accounts
and originating home mortgages for consumers.
- Thrift institutions include Savings Banks and Savings and Loans associations (S&Ls).
2.2. Operations
* Sources of funds:
 Deposits: Main source of SIs funds, including savings and time deposits
 Borrowed Funds: From other depository institutions in Federal Fund market, through
Repo, or borrow Federal Reserve
 Capital: Retained earnings and funds obtained from issuing stock
* Uses of funds:
 Cash
 Mortgages
 Mortgage-backed securities
 Other securities
 Consumer and commercial loans
 Other uses
2.3. Regulation (Who regulates?)
 The Office of the Controller of the Currency supervises mutual SIs and federal Sis
 Federal Deposit Insurance Corporation (FDIC) guideline
 The Federal Reserve regulates parent holding companies of SIs
 The Bureau of Consumer Protection supervises larger SIs (with at least $10 billion in
assets) to ensure that they comply with federal consumer protection laws.
* Regulatory Assessment of Savings Institutions: CAMELS
 Capital adequacy
 Asset quality
 Management
 Earnings
 Liquidity
 Sensitivity to market conditions

Chapter 4: The U.S. Federal Reserve and the Creation of Money

1. Central bank definition and roles
1.1. Definition:
Government entities that responsible for managing and supervising the money system of the
nation.
1.2. Roles:
- Central bank gives money to commercial banks in the time of crises to avoid panic life
situations in the markets
- Reserves are just like saving help to fall back upon from difficult or contingent situations
- Banks it self has no money, for this there are some legislations required, that are issued in
the form of Prudential regulations by central bank for determining credit policy
2. Central bank’s activities
2.1. Supervising banking system
- Issuing banking license
- Controlling and managing banking operations: individually/ systematically
- Rescuing during crisis (cứu trợ bank trong các cuộc khủng hoảng tài chính):
+ Đưa tiền cho bank để giải quyết liquidity
+ Mua stock ngân hàng, chịu trách nhiệm cho ngân hàng => tạo niềm tin cho khách hàng
VD: Cuộc khủng hoảng tài chính năm 2007 tại US-> Bank systems bankrupt-> UK-CB
recure liquidity and confident of customers
2.2. Creating monetary policies
- Monetary policy is(that adjust the money supply to the economy) a central bank's actions
and communications that manage the money supply
- 2 types: + Borrow: open market operation(OMO)
+ Non-borrow: reserve requirement, Discount Rate (RR)
- Goal: to promote maximum employment, stable prices and moderate long-term interest rate
2.3. Printing banknotes and minting coins (most powerful and dangerous act)
- The Central Bank controls the issue of banknotes, coins and cash
- The economy grows at 2% (ideal rate)
- Less stable central banks may print banknotes to help the government. However, This must
be linked to growth in the economy or inflation will follow.
2.4. Banker to other banks
- take deposit from comercial banks through reserve account
- give loan when comercial banks need
- Reserve Requirement is decided by central banks as a ratio of banks liabilities, based on the
economic condition, financial situation of banks, etc. and revised periodically.
2.5. Bankers to government
- collect tax: reduce money government, rise for CB
- buy T- bonds,bills: rise government, reduce CB
2.6. Controlling national currency reserve
- Central bank could buy or sell the country’s currency to influence the foreign exchange rate.
- Foreign exchange rate low => better condition for export activities but also means price of
national debt is higher.
- Purpose: + support international trade
+ pay international debt
+ keep impact on foreign exchange rate
2.7. Acting as the Lender of Last Resort
- The Central Bank will help other banks temporarily when they meet problems with their
liquidity or rescue banks during crisis.
2.8. Liaison with International Bodies
- Central banks will liaise with other international financial bodies like the IMF (International
Monetary Fund) and the International Bank for Reconstruction and Development (IBRD),
usually called the World Bank.
- The Central Bank also liaise with and take part in discussions at the Bank for International
Settlements (BIS) in Basel.

CHAPTER 5: Monetary Policy

1. Monetary Policies Objectives (4)
- Stability in the price level (inflation rate - CPI):
+ speed of bossing value overtime of the currency
+ higher CPI=higher speed=loss stable
+ most of the case lower CPI=better
+ Source of high CPI: Shortage of supply
Increase value in foreign currency
Ex: U.S economy 2022 with high inflation rate (6.2%) and low or even negative GDP, thus,
the potential stagflation
- High employment rate (low unemployment rate):
+ Show the involvement of the working capability of the economy
+ higher = better
Optional unemployment rate ideally 4%-6%
- Economic growth(GDP):
+ show the economic condition for economic parties to growth
+ higher = better
+ ideally 10%
+ Stable interest rate: directly related to the economic growth and the health of financial and
banking systems.
- Stability in Foreign Exchange Rate:
+ Foreign Exchange Rate impact to economy through:
 Inflation
 International transaction: the amount of money in 1 country pay for the rest of the world
in import and the profit takes from the rest of the world in export(BoP)
+ The fluctuation of exchange rate is impact mainly by:
 The monetary policies of the Central Banks
 The fiscal policies of the government
 The demand and supply of the currency in foreign exchange market.
2. Monetary Policies Tools
- Borrow:
 Open Market Operations(OMO)
 Repo
 Quantitative Easing (QE)
- Non-borrow:
 Interest rate(IR) = Federal fund rate
 Reserve requirement
3. Monetary policy types
- Tightening/ hawkish monetary policies(chính sách thắt chặt): reduce money supply
-> difficult economic conditions
+ sell T-bond
+ interest rate increase
+ Reserve requirement increase
- Loosening/ dovish monetary policies(chính sách nới lỏng: increase money supply
-> pleasant economic conditions
+ buy T-bond
+ interest rate decrease
+ Reserve requirement decrease
4. Monetary policy trade-off
- A monetary policy that furthers progress toward one goal may actually make attaining
another either difficult or even impossible.

Chapter 6: Insurance Companies

1. Insurance company operation
- The source of income:
 Insurance premium
 Investment income
- The source of expenditure:
 Insurance payment(extremely uncertain)
-> application of statistic to predict the pattern of payment
 Operation cost
2. Ownership of insurance company
- Stock insurance companies(public own): owned by shareholders
- Mutual insurance companies( mutually own): owned by polices holders

3. Types of insurance products

- Life insurance: cover the risk of death
Term life Whole life Universal life ( BH liên kết
chung)
Has term No term Fiexible term
Lower premium Higher premium Fiexible premium
(leveled, renewable) (leveled)
No cash value Has cash value for insurer Has cash value

- Health insurance: cover the risk of health damages

+ 2 types:
 Insurance payment= sum of money
 Insurance payment= medical treatment
Ex: HMO, PPO, POS
- Property and casually: cover the risk of property damages and events
Ex: car insurance, house insurance
+ Insurance payment is very uncertain
- Investment-oriented contract: cover the risk of investment
GIC (BH đảm bảo đầu tư) Annuity( niên kim)
Zero-coupon payment Pension plan

4. Insurance industry trend

- Deregulation-> blur line between insurance company and other Finance Institutions
- Internationalization-> expandision to foreign market of major
Ex: Prudential Insurance Company of America has entered Vietnamese market in 1995,
officially operating since 1999

AIA is an American-founded Hong Kong multinational insurance and finance corporation,

which opened a Vietnamese subsidiaries in 2000.

- Demutualization-> slight of ownership from mutually own to public own

Chapter 7: Investment banks and Security firms

1. Mutual funds:
-Dividend of holding stock
-Capital gain of stock
=> Price appreciation of fund’s share.
* Def:
A mutual fund is an investment company that sells shares and uses the proceeds to
manage a portfolio of securities.

+Purchase corporate
+Securities
Investors Mutual funds
+T-bonds
+ Municipal bonds

* Management of Mutual Funds:

Each MF is managed by one or more portfolio managers, who must focus on the
stated investment objectives of that funds.

Types of maket How MF use that market

Money markets Money market mutual funds invest in various money market instruments
such as Treasury bills, commercial paper, banker's acceptances, and
certificates of deposit.
Bond markets - Some bond mutual funds invest mostly in bonds issued by the U.S
Treasury or a government agency. Others invest in bonds issued by
municipalities or firms.
- Foreign bonds are sometimes included in a bond mutual fund portfolio.
Mortgage markets Some bond mutual funds invest in bonds issued by the Governmen
National Mortgage Association (GNMA, or "Ginnie Mae"), which uses th
proceeds to purchase mortgages that were originated by some financia
institutions.
Stock markets Numerous stock mutual funds purchase stocks with various degrees of risk
and potential return.
Futures markets Some bond mutual funds periodically attempt to hedge against interest rate
risk by taking positions in interest rate futures contracts
Options markets. - Some stock mutual funds periodically hedge specific stocks by taking
positions in stock options.
- Some mutual funds take positions in stock options for speculativ
purposes
 Swap markets Some bond mutual funds engage in interest rate swaps to hedge interes
rate risk.

* Governance and management:

- Run by an investment company ( whose owners # from the shareholders in the
MF)
- The investment company may charge high fees to the shareholders of the MF ->
experts represent income generated by the investment company.

* Categories:
+ Stock MF:
- Growth funds
- income fund
- Mixed, ( growth + income)
- International fund
- Specially fund
- Index fund
- Multip fund
+ Bonds MF:
- Income fund
- tax-free fund
- junk-bond fund
+ Maturity:
- long term ( more IR securities)
- Intermediate
2. Exchange-traded fund
* Background of ETFs
Exchange-traded funds (ETFs) are designed to mimic particular stock indexes and
are traded on a stock exchange just like stocks.
* Management of ETFs
Since ETFs are intended to mimic a particular index, they are not actively
managed, which means their investment portfolios are usually fixed at issuing.
Therefore, fees for ETF also much lower comparing to conventional mutual funds.
+ Capital Gains on ETFs
Because ETFs are not actively managed, they normally do not have capital gains.
However, ETFs are appealing to investors because they are an efficient way to
invest in a particular set of stocks.
+ Liquidity of ETFs
ETFs are more liquid than shares of open-end mutual funds because they can be
sold at any moment during trading hours.
+ Brokerage Fees
One disadvantage of ETFs is that each purchase of additional shares must be
executed through the exchange where they are traded.
Investors incur a brokerage fee from purchasing the shares just as if they had
purchased shares of a stock.
Chapter 8: Pension Funds

1. Pension fund definition and classifications

 Definition
A Pension plan is a fund that is established for the eventual payment of retirement benefits.
The entities that establish pension plans, called pension plan sponsors, may be:
- Private business entities acting for their employees (called corporate or private plans)
- Government (public plans)
- Union (Taft Hartley plans)
- Individuals for themselves (individually sponsored plans).
Public/government pension funds tend to concentrate more on credit market instruments
and less on corporate stock, while the vice versa case happens to private funds.
Public pension funds are retirement plans established and managed by government
entities to provide retirement benefits to public sector employees, such as government
workers, teachers, and civil servants. These funds are financed through contributions
from both employees and the government employer.
Private pension funds, also known as occupational or company pensions, are
retirement plans established by private companies for their employees. These plans
are funded by both the employer and the employee contributions, with the goal of
providing retirement benefits to employees once they retire.
 Classifications
- Defined-benefit plans: plan sponsor agrees to make specified amount payment
annually/monthly to qualified employees, beginning at retirement. These payments are
determined by a formula that usually takes into account the length of service of the
employee and the employee’s earnings.
- Defined-contribution plans: plan sponsor is responsible only for making specified
contributions into the plan of behalf of qualified participants, not specified payment to the
employee after retirement. The amount contributed is typically either a percentage of the
growth of the plan assets (the employee’s salary and/or a percentage of the employer’s
profits).
- Hybrid Pension Plans: is the combination between defined-benefit and defined-
contribution plans. There are several types of hybrid plans, such as pension equity, floor-
offset, cash balance plan, etc.

2. Pension fund operation

 Investments in pension plan
Different types of pension plan have different style of investment:
- Union pension plan mainly invest in the U.S bond and stock.
- Coporate and public pension plan invest significant propotion of their fund in
international securities.
 Manager of pension funds
- Use in-house staff to manage all the pension assets.
- Distribute the pension assets to one or more money management firms to manage
- Combine alternatives
 Regulations of pension plans
The pension fund must comply with relevant laws and regulations governing retirement
plans, such as ERISA (Employee Retirement Income Security Act) in the United States, the
Pension Protection Act (PPA)
The Employment Retirement Income Securities Act of 1974 (ERISA) is the main
regulation applied on the pension funds operating in the U.S. The focuses of this Act are:
1. Established funding standards for the minimum contributions that a plan sponsor must
make to the pension plan to satisfy the actuarially projected benefit payments.
2. Established fiduciary standards for pension fund trustees, managers and advisors.
3. Established minimum vesting standard and vesting requirements.
4. Created the Pension Benefit Guaranty Coporation (PBGC) to insure vested pension
benefits.
The Pension Protection Act (PPA) provides significant changes in the operations of private
pension plans and also extends some tax incentives for retirement savings.